It’s getting harder and harder to tell the commercial bankers from the investment bankers, as a quick look at the commercial markets group of Union Bank of California reveals.
Traditionally, of course, commercial bankers have financed business receivables and inventory, equipment purchases, and provided lines of credit to businesses. Investment bankers, by contrast, handled financing for corporate acquisitions, or the issuing of stocks and bonds.
But the commercial guys have been stepping into investment banker wingtips more and more.
Case in point: Joseph Otting, senior vice president and manager at Union Bank in Los Angeles, said he now has two acquisition financings for Los Angeles-area clients on the front burner, and many more are either done or in the pipeline.
“They are both industry roll-ups,” said Otting, using the buzz phrase for an intra-industry merger. “One is for $14 million (of financing), and another for $20 million.” For confidentiality reasons, Otting declined to reveal names or industries.
In general, Otting works with businesses with between $10 million and $200 million in revenues, in the vast and great “middle market,” which makes up the bulk of the business world in Los Angeles.
Otting said he can even have Union Bank, through its own fund, take an equity position in a company a virtually unheard-of proposition in years past for a proper commercial banker. Moreover, commercial bankers like Otting who used to extend credit mostly on assets or receivables are now hip to lending against “EBITDA.”
That stands for earnings before interest, taxes, depreciation and amortization, and it’s been a favorite variable among investment bankers since the junk bond days. Why? On paper, a company might depreciate an asset, showing a decrease in earnings, as toted up by accountants. In the real world, that company’s cash flow hasn’t changed.
“More often, we are looking at whether a company’s cash flow can support the debt, not just the company’s assets and liabilities,” said Otting.
Otting heads a staff of 25 in Los Angeles, supported by another 15 professionals in other parts of the bank skilled in credit analysis. The only aspect of investment banking Otting won’t do is the underwriting of securities, which, of course, requires a license from the SEC.
When is the move of commercial bankers into what was formerly the turf of investment bankers going to stop? It probably isn’t, said Otting.
Obviously, the commercial banks are bulling into investment banking via the merger route, what with San Francisco-based BankAmerica Corp. buying Bay Area brokerage Robertson Stephens (now named BancAmerica Robertson Stephens), or with Torrance-based Imperial Credit Industries Inc. , heavily owned by Imperial Bank, taking over former Beverly Hills brokerage Dabney Resnick, now named Imperial Capital Group LLC.
Otting foresees the day when Union Bank will underwrite securities and file with the SEC, although perhaps through a subsidiary. He points out that commercial banks often have an immense advantage over investment bankers they know and have worked with likely investment banking clients for years.
Before a company is large enough to warrant investment banking services particularly the issuing of stock or bonds, or financing a merger it probably has been nurtured along by loans from a commercial bank, and lines of credit, even international financing.
“We have relationships with clients, which we should develop into investment banking relationships, if that’s called for,” said Otting.
Investment bankers have been complaining that in the late 1990s, there are many players in the corporate finance market, and everybody seems to have the financing to back up the deal-making wizardry.
But in listening to Otting, it would seem the competition is only going to get even more fierce.
Maybe you thought the expression “leveraged buyout,” or LBO, was a leftover from the 1980s, along with pastel colors or the Miami Vice unshaven look.
Think again. The nation’s buyout funds raised a thumping $10.5 billion in the fourth quarter of 1997, the biggest quarterly wad ever. For the year, a record $34.6 billion was raised, easily crushing the previous annual record of $23.2 billion, set in 1996.
Among the big fund raisers in 1997 were the Los Angeles-based Freeman Spogli & Co., which raised $620 million in the fourth quarter (by the way, Richard Riordan confidante Bill Wardlaw is a partner at Freeman), and Apollo Advisers LLP, based in West Los Angeles and New York, which is closing in on raising $2.5 billion.
Downtown Los Angeles-based Oaktree Capital Management LLC raised $1.2 billion, while Santa Monica-based Wilshire Associates raised $200 million.
The buyout funds have had a battle in the ’90s, because the emphasis has been on strategic mergers or industry roll-ups, in which two or several like companies merge, gaining economies of scale.
Also, public companies often financed by interest-free stock offerings have been aggressive buyers of private companies, buying at premium “multiples” of earnings. In plain English, that means they have been outbidding the leveraged buyout funds by paying more, based upon a target company’s earnings.
Managers of buyout funds concede there is lots of competition.
“There is no question that the strategic buyers (public companies) have become formidable in the M & A; market. Their currency (issued stock) is relatively less expensive,” said Wardlaw.
But Wardlaw also noted the huge size of the U.S. economy, the fact that higher prices causes a lot more owners to consider selling, and that “many of these strategic buyers are also shedding assets, to get down to core business. That often spells a tremendous buying opportunity.”
Contributing reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.